Friday, September 26, 2008

House GOP plan stinks

The House Republican plan for some sort of insurance totally fails to address the problem. Even if it was possible to come up with a workable and affordable insurance plan for these assets, the banks will still have illiquid mortgage assets on their books. In order to make loans and un-seize the credit market the banks will have to be able to sell those assets. Insurance does not do this. The Paulson asset purchase plan will. Nobody will be exactly sure what the assets are worth until housing prices find a bottom, and thus nobody is willing to buy them. Even if it is reasonable to assume that the assets are currently undervalued, the "smart money" is waiting for a "puke fest" in order to buy at the lowest possible prices. The problem is that the puke fest will spell a very disastrous and economically contagious situation.

There's a lot about the Paulson plan that has become unsavory in its growth from a three page draft to a hundred-plus-page draft. If they do this in "traunches" that are too small they risk collapsing the confidence of the market. If they make it too punitive then banks may not participate.

But it is a plan with a core that is capable of succeeding. The House Republican plan is a fundamentally flawed plan that cannot be taken seriously.

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